BP aims to speed up greener fuels push with $4.1bn deal for Archaea

BP has announced its biggest low-carbon energy acquisition with the planned purchase of a US-listed biogas producer for $4.1bn as the UK oil major seeks to accelerate its push into greener fuels.

The deal for Houston-based Archaea Energy would immediately increase BP’s biogas supply volumes by 50 per cent and provide a development pipeline of more than 80 projects that could see volumes quintuple by 2030, BP said on Monday.

Archaea, which describes itself as a leading producer of renewable natural gas in the US, produces the low-carbon fuel by processing organic waste from landfill sites and the farming industry. BP is paying $3.3bn in cash and Archaea has approximately $800mn of net debt.

Founded by the owners of a landfill in Pittsburgh, Archaea has 50 renewable natural gas and landfill gas-to-energy facilities across the US, producing about 6,000 barrels of oil equivalent a day.

Archaea shares jumped more than 50 per cent after the announcement to just under BP’s offer of $26 a share. BP’s shares fell 1 per cent.

Investment bank Jefferies said the “large premium” — 38 per cent compared with the past 30 day’s average share price — could cause concern for some investors.

However, BP’s chief executive Bernard Looney described it as “absolutely the right deal” for the oil major’s shareholders.

“It’s the best deal I’ve seen inside the company since we did Aker BP in 2016,” Looney said, referring to the successful tie-up with Norwegian oil and gas producer, Det Norske Oljeselskap, six years ago.

“If you want secure energy for your country what better way than to capture gas and methane that would otherwise be leaking into the atmosphere from landfill sites,” he added.

Out of the 2,500 landfill sites in the US, some 500 already had gas capture facilities but another 1,000 sites would be suited to the technology, Looney said.

So-called renewable natural gas is produced by removing carbon dioxide and other impurities from the biogas that is naturally emitted when organic material decomposes. It can then be pumped into existing pipelines to replace traditional natural gas extracted from fossil fuel deposits.

Currently it makes up a tiny share of the overall US natural gas market, delivering about 0.2 per cent of overall supply, according to a recent report from Goldman Sachs. However, the sector is growing fast as companies and some states look for ways to slash their emissions.

Looney said demand in the US already outstripped supply and that many companies and some institutions, such the University of California, had already set targets for biogas procurement.

Looney is spearheading one of the most ambitious corporate overhauls in the sector, having committed to cut BP’s oil and gas production by 40 per cent by 2030, while it invests in the provision of greener forms of energy.

BP has said investment into its five transition businesses — biofuels, convenience (forecourts and food), charging, renewables and hydrogen — would reach 40 per cent of total group expenditure by 2025 and 50 per cent by 2030.

Given Archaea’s existing project pipeline, the combined business could produce about 70,000 barrels of oil equivalent a day of biogas by 2030 and double projected earnings from biogas to $2bn in the same year, BP said.

Nick Stork, chief executive of Archaea Energy, said the sale to BP would enable the business to “realise its full potential”.

In June, Archaea signed a $1.1bn joint venture to produce biogas from 39 landfill sites across the US with Republic Services, a major US landfill operator, in one of the biggest such deals to date.

The BP deal is still subject to approval by regulators and Archaea shareholders, and despite the premium BP has offered some analysts suggested competing bids could still emerge.

“[Archaea] shareholders may be wanting a little more, and it wouldn’t be a surprise to see a competing bid,” analysts at Tudor, Pickering and Holt, a Texas-based investment bank, said in a note.